Stocks to Watch: Dividends are Back

Markit, the financial information services company, has come up with some forecasts for dividends for the current fiscal year and predicts that total payouts from the companies that make up the MSCI Europe ex-U.K. index will reach €185.9 billion for the current fiscal year, up 1.5% on the year. The upturn is more pronounced when special dividends are excluded: an increase in ordinary dividends of 6.8%, up to €185.2 billion. Having been almost flat for the past two years, even a return to modest growth is worth paying attention to.

Aggregate dividends (showing breakdown between ordinary and special dividends) over the past four years, with forecasts for 2013 and 2014.

Markit

Banks will pay the most, in absolute terms, says the data firm. Having wrestled with restructuring and demands on capital that has suppressed dividends over several years, Markit forecasts that European banks will dole out over €24 billion, 8.3% higher than last year.

Spain’s Banco Santander will be the largest dividend contributor in absolute terms, according to Markit’s forecast. It has supported its dividend by offering scrip dividends, enabling the investors to choose whether to receive cash or shares in the company. In 2012 when the bank paid out €6.086 billion, take-up of the scrip was 80%.

But growth in the sector is also being driven by the recovery of banks in France and Switzerland, Markit said. Dividends there are likely to increase substantially.

In France the trend is expected to be overwhelmingly positive, with Credit Agricole expected to re-initiate dividend payments in fiscal 2013, while Markit expects Societe Generale to more than double its yearly dividend payout for 2013 to €0.95.

The chief executive of Societe Generale, Frédéric Oudéa, said in a recent interview that the bank will propose a payout ratio between 35% and 50% for 2013, while Credit Agricole said it would return to a “normal” dividend policy this year.

As far as Switzerland is concerned, Markit expects Credit Suisse to pay out more than €1 billion in its first all-cash dividend since 2010 for fiscal 2013. Last year the bank proposed its dividend with a 90% stock option, and the year before it included a scrip option.

UBS is set to continue the good news, with Markit seeing the other Swiss banking giant increasing its forthcoming dividend by two thirds to 0.25 Swiss franc, representing a payout of around 33 billion Swiss francs.

Elsewhere, utilities will be the highest yielding sector, said the firm, with dividends of 5.8% although that represents a projected 7% fall in aggregate dividends since last year.

Markit said the largest single increase is likely to come from Telefónica, which will resume dividend payments after stopping last year to reduce net debt. Telefónica said in an investor presentation in May that it had approved a dividend for 2013 of €0.75 per share, with a first payment of €0.35 made in November. Markit forecasts the 12 month yield at 6.6%. This makes Telefónica the company with the highest expected 2013 dividend yield among the 25 largest companies by stock market capitalization in the information and communication technologies sector.

Markit’s dividend team project payouts based on fundamental analysis such as company guidance, consensus estimates, historical patterns and peer group trends. Using these and other inputs the team undertakes a bottom-up analysis of each company’s capacity to distribute cash to shareholders.